BIDU Baidu Inc

BEIJING—China's ride-hailing champion, after besting Uber Technologies Inc., appears to be facing a tougher opponent in domestic regulators.

Several major cities issued proposed industry regulations in recent days that would restrict the types of vehicles that can be used and who can drive them, potentially crimping a large chunk of Didi Chuxing Technology Co.'s business. Meanwhile, the country's antitrust regulators continued to investigate Didi's deal to acquire U.S.-based Uber's China unit.

Didi issued a strongly worded protest over the weekend against the draft regulations from Beijing, Shanghai, Shenzhen and at least three other major cities. The company said the rules, if adopted in their current form, would force "the vast majority" of its drivers and cars off the road.

"Millions of online ride-hailing drivers may be about to lose their jobs and paychecks, which would mean millions of families may lose an important income source," Didi said in its statement.

Didi's open criticism of the government's plans marked a rare departure from common practice for a Chinese company. Didi has previously said it welcomed regulation of the evolving ride-hailing sector, and the company, one of China's hottest startups with a valuation of more than $33 billion, had been enjoying smooth going in recent months.

China's national regulators this summer officially legalized the sector, which had operated in a gray area. Didi's main rival, Uber, ceded the market after a costly competition in which the companies subsidized rides. Didi added Apple Inc., Foxconn Technology Group and Baidu Inc. this year to its investor list, which already includes Chinese internet majors Tencent Holdings Ltd. and Alibaba Group Holding Ltd. In recent months, Didi began reducing subsidies and raising fares.

Local Chinese traffic regulators have remained skeptical of Didi, concerned about whether its drivers are adding to traffic congestion and competing with established taxi companies. Antitrust regulators also began scrutinizing Didi's pricing power after the company said in August it agreed to acquire Uber's China unit. The combined entity, in which Uber and other investors would have a 20% stake, is likely to account for an overwhelming share of rides, if Didi's and Uber's track records hold.

"We must maintain our strategy of prioritizing public transportation to use the road resources reasonably, decrease the use of motor vehicles and ease traffic congestion," Beijing's municipal traffic authority posted on its Weibo social-media account, in remarks similar to those issued by the other cities.

The draft rules from Beijing, Shanghai and Shenzhen would limit drivers to those with local residency permits, and require cars to meet size restrictions and have Global Positioning System and emergency alert devices installed. Some cities plan to require ride-hailing vehicles to have a minimum wheelbase, which would rule out some small compact cars.

The rules may be amended before being adopted. National regulations for the ride-hailing sector were less restrictive when adopted than they were in a first draft issued last year.

In their current form, the latest rules are likely to make Didi a more expensive service, with fewer drivers and passengers, analysts said. "The era in which ride-hailing services are significantly cheaper than taxis or other special car services is gone," said Xiaofeng Wang, a China internet sector analyst for Forrester.

By requiring local residency permits, the rules take particular aim at a mainstay of the 14 million drivers Didi relies on—migrant workers who generally work for lower pay than local residents.

Didi said Saturday that only less than 2.4% of its drivers in Shanghai were local residents. A spokeswoman didn't reply to requests to explain why this percentage is far lower than the 69% the company cited last year.

Some Didi passengers joked that the new rules would make the company's drivers desirable dating prospects, with the pool limited to those with good quality cars and sought-after big-city residence permits.

For migrant drivers, however, the proposed regulations are creating uncertainty. Ge Wanjiang, who works and lives in Beijing, bemoaned that the might be forced back to his hometown, the eastern city of Heze. The 43-year-old said he purchased a Volkswagen Santana with his savings two months ago so he could work as a driver for UberChina, which Didi is buying.

"If the policy does not allow us to drive as an Uber driver in Beijing, how do I deal with my car?" Mr. Ge said. "I have to go back to Heze, but it will be useless in my hometown."

Chinese experts have been divided on regulation of the sector, with some arguing for a lighter touch to help boost new internet businesses, while others urge caution.

"We have to understand that ride-hailing via the internet is still a taxi service at some point," said Li Junhui, a scholar at the China University of Political Science and Law. "This industry should develop moderately instead of with great force."

Yang Jie and Kersten Zhang contributed to this article.

Write to Eva Dou at eva.dou@wsj.com

(END) Dow Jones Newswires

October 10, 2016 10:05 ET (14:05 GMT)

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